Gold prices are likely to experience volatility in September

Comex Gold (December) gained over 4% in August, touching new all-time highs four times during the month. Sharp rebound from month low of $2403.8 per ounce hit earlier in August to close the month at $2527 per ounce, highlighted the volatility of the gold market, driven by anticipated rate cuts, weaker dollar and gold's safe-haven appeal amidst geopolitical tensions.

Hopes of a Fed pivot in September following hints of an imminent rate cut from Federal Reserve Chair Jerome Powell pushed gold to all time high of $2570 per ounce. Federal Reserve Chair Jerome Powell reinforced expectations of a rate cut during his speech at Jackson Hole, emphasizing that future rate decisions would depend on upcoming economic data. He noted that while inflation risks had decreased, risks in the job market had increased, bolstering the case for lower borrowing costs. Following this upside move, gold futures consolidated just below those levels, as markets remained divided on whether the Fed would implement a 25 or 50 basis point cut in September, though they continued to price in 100 bps in cuts for the rest of the year.

U.S. economic data showing resilience to higher interest rates after the Jackson Hole Symposium as Services PMI unexpectedly ticked higher, there is a jump in Durable Goods Orders and US GDP for Q2 2024 showed a significant increase. Moreover, Fed’s preferred inflation gauges, the headline and core PCE price indices, were both revised lower to indicate sharper slowdowns during the second quarter. Thus, Gold ease from the record highs amid some pressure from a stronger dollar and higher bond yields as new economic data eased the Fed’s urgency to ease monetary restriction.

In its July meeting, Fed maintained interest rates unchanged as widely expected. The Fed pointed to recent economic trends, including progress in cooling consumer prices and a weakening labour market, as supportive of a less restrictive monetary policy. The unemployment rate in July unexpectedly rose to its highest level since 2021, and wage growth slowed more than anticipated, pushing gold prices to an all-time high. However, prices corrected shortly afterward, driven by weak manufacturing data. Investors continued to weigh the likelihood of a U.S. recession amid weak economic data and disappointing corporate earnings. Meanwhile, the PBoC refrained from buying gold for the third consecutive month in July, following an 18-month purchasing spree that ended in May.

Despite these developments, Gold futures climbed to all-time highs for three consecutive sessions, driven by strong safe-haven demand amid geopolitical uncertainties and significant global ETF inflows. Geopolitical tensions in the Middle East and escalating conflicts between Ukraine and Russia further supported the bullish trend in gold. Additionally, the PBoC allocated new gold import quotas to commercial banks, anticipating renewed demand despite high prices. Holdings in the SPDR Gold Trust, the world's largest gold-backed ETF, reached a seven-month high, reflecting increased financial investment demand.

However, Gold prices pulled back occasionally during the month, as mixed US data, including easing CPI and stronger retail sales, failed to provide clear direction on the Fed’s monetary policy. Strong retail sales and lower unemployment claims suggested a less dovish Fed stance, leading investors to adjust their expectations from an aggressive 50 basis point rate cut in September to a more modest 25 basis points.

Gold has risen over 20% this year, bolstered by expectations of imminent rate cuts by the U.S. Federal Reserve and robust safe-haven demand. The upcoming PCE report, crucial for the Fed's September FOMC meeting, will be the last key inflation measure before deliberations, likely carrying significant weight in their decision-making.

Comex Gold (December) closed the month of August on a weaker note at $2,527 per ounce, retreating sharply from the $2,564 per ounce level in the last week, owing to sharp rebound in dollar to 101.8 levels as moderating inflation in the US reinforced the view that Fed is likely to implement a modest 25 bps rate cut in September. Strong consumer spending, easing inflation, and better-than-expected GDP growth in the US reduced expectations for more aggressive Federal Reserve easing. Going forward, gold prices are likely to fluctuate as investors await the US labor report for insights into economic strength. A weaker-than-expected jobs report could dampen hopes for a soft landing and intensify calls for the Federal Reserve to implement a 50 basis point rate cut. On the other hand, a better-than-expected report may not lead to significant market reactions, as it is unlikely to alter current rate cut expectations.

Overall, gold prices are likely to experience volatility in September due to US economic data. If the data pushes Fed to adopt a more aggressive easing stance, gold prices could surge to new all-time highs. However, further conviction of the prevailing expectation of a 25 basis point rate cut in the September 17-18 meeting may keep gold prices within a certain range.

Comex Silver decline to a 3-month low of $26.50 per ounce in August, primarily driven by a bearish outlook on manufacturing and a broader selloff in industrial metals. However, it subsequently recovered to $29.14 and close moderately positive due to a combination of factors, including soaring global demand, particularly from the solar industry, which relies heavily on the metal for photovoltaic cells and geopolitical uncertainty. Going forward increased global demand, particularly from the solar and battery industry, rising geopolitical tension and anticipation of interest rate cut by Fed will boost the appeal for silver. Additionally, India's significant increase in silver imports in 2024 also contributed to demand surge.

Silver erased all the gains by month end amid rising conviction of a 25 bps rate cut and growing concerns that China might not meet its 5% growth target for 2024. Silver may experience some softness due to the dollar’s recovery, ongoing concerns about Chinese demand, and caution ahead of key US economic data. Economic slowdowns in both the US and China pose significant challenges for industrial demand, potentially limiting silver’s upside potential in the near term.